Markets Overview

  • ASX SPI 200 futures up 0.5% to 7,757.00
  • Dow Average up 1.5% to 38,686.32
  • Aussie up 0.2% to 0.6645 per US$
  • US 10-year yield fell 4.7bps to 4.4985%
  • Australia 3-year bond yield fell 2.9 bps to 4.05%
  • Australia 10-year bond yield fell 2.5 bps to 4.41%
  • Gold spot down 0.7% to $2,327.33
  • Brent futures down 0.9% to $81.11/bbl

Economic Events

  • 09:00: (AU) May Judo Bank Australia PMI Mfg, prior 49.6
  • 11:00: (AU) May Melbourne Institute Inflation, prior 0.1%
  • 11:00: (AU) May Melbourne Institute Inflation, prior 3.7%

Asian stocks are set to gain in early trading, following US peers on Friday, as expectations for Federal Reserve rate cuts were bolstered after the central bank’s preferred measure for inflation eased.

Equity futures in Australia, Japan and Hong Kong point to higher opens on Monday. US contracts were little changed after the S&P 500 rose 0.8% in its previous session, following a late surge amid a rotation from technology stocks to other industries.

The gain follows the best month for Asian stocks since March last month, aided by signs of stabilization in China’s economy and a weaker dollar amid bets the Fed can cut interest rates this year. But with valuations appearing stretched, markets are likely to be volatile as traders assess the outlook for central bank policy, while geopolitical tensions surrounding the Middle East and the US election simmer, according to AMP Ltd.

The dollar was steady in early trading. US Treasuries rose Friday as the Fed’s preferred measure of inflation, the core personal consumption expenditures price gauge, met estimates and posted the smallest increase this year. Inflation-adjusted consumer spending unexpectedly fell 0.1%, dragged down by a decrease in outlays for goods and softer services spending. Wage growth, the primary fuel for demand, moderated.

Other News

Australia’s central bank may have no choice but to resume raising interest rates this year if inflation fails to slow, according to money markets, setting it up as a potential outlier to a post-pandemic global tightening cycle that has all-but ended.

Aside from Japan, which only began hiking this year, Australia is the only developed economy where money markets are still pricing some chance of a rate increase. The reasons include a cash rate of 4.35% that’s lower than peers and inflation that’s proving stickier than the Reserve Bank had anticipated.

“The RBA has little tolerance for any upside surprise in the inflation data,” said Su-Lin Ong, chief economist for Australia at Royal Bank of Canada. If second-quarter data confirms the disinflation trend has stalled, the RBA “have to be forced to hike, reluctant all the way,” she said.

Australia’s inflation came in hotter than expected in the first quarter and the April print last week showed a quickening of price gains. Overnight-indexed swaps are pricing a 1-in-5 chance of a hike by the RBA at its Aug. 6 meeting — ahead of second-quarter inflation data due on July 31.

The RBA targets inflation of 2%-3% and the April data came in at 3.6%.

After the April data, economists at ING Groep NV pushed out their call for a first RBA cut to 2025 from 2024, warning that “we are only one bad inflation report from amending our forecasts to include some additional tightening.”

Another strong quarterly price print would worry the inflation-targeting central bank. The board resumed rate-hike discussions at its May meeting and has said it isn’t ruling anything in or out. This comes at a time when the broader economy is slowing, unemployment is ticking higher and consumer spending is weak.

The RBA has kept the policy rate steady for six months and remains in data-dependent mode, with its forecast showing that inflation will only return to target next year. Governor Michele Bullock has expressed a willingness to be patient as she seeks to slow inflation without choking off economic growth.

This is why most economists and markets still anticipate that the RBA will keep rates higher for longer, rather than hike again. The central bank itself has sent a strong signal that the bar to a further tightening is high following 13 increases between May 2022 and November 2023 that took borrowing costs to a 12-year high.

Former RBA Assistant Governor Luci Ellis says the risk of stagflation — flat gross domestic product growth and still-elevated inflation — could lead to a later start to easing. That’s a more “plausible, and pessimistic scenario,” said Ellis, who is now chief economist at Westpac Banking Corp.

The rate-setting board next meets on June 18 when no change is expected. Ahead of that, policymakers will get a chance to assess other data: a closely-watched minimum wage decision on Monday, first-quarter GDP on Wednesday and another round of labor market data the week after.

On Friday, markets will hear for the first time from new Deputy Governor Andrew Hauser — formerly from the Bank of England — as he speaks on Australia’s economic outlook at a conference in Sydney.